Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

Monday, January 7, 2013

New Business Tax Provisions

So
what are the key business tax changes from the American Tax Relief Act of 2012?
Here are the ones that caught my eye:

(1)Bonus
depreciation extended through 2013.

The bonus allows one to immediately deduct 50% of
the cost of qualifying assets. If you
buy a backhoe, for example, you can immediately expense one-half the cost – and
you get to depreciate the remaining half.

(2)S corporation
built-in gain tax recognition period

OK, this one is
somewhat obscure. Suffice to say that a C corporation that switches to an S
corporation cannot sell its business until after several years have run. It used
to be that the period was 10 years, then reduced to 7 and then to 5 years. The Act
extends the 5 years for sales through 2013.

What this is
about is allowing tax planners to restructure businesses, or parts of
businesses, for sale, in the hope of spurring – or at least not deterring – business
and job activity.

(3)Expensing for
certain film and television activities

If Peter Jackson
had filmed The Hobbit in the United States, he would have been able to expense
the first $15 million in production costs. Three-fourths of the movie
production must take place in the U.S.

The Act extends
this break through 2013.

(4)Increase in
Section 179 expensing

Section 179
allows taxpayers to immediately expense equipment used in a business. Normally
this type of expenditure would be depreciated over time (barring the bonus
depreciation discussed in (1) above). Section 179 however has a limit on the
amount that can be expensed and the amount of assets you can purchase and still
qualify for the break.

In 2011 the
amount that could be expensed was $500,000 as long as assets purchased did not
exceed $2 million. That dropped to $125,000 and $500,000 for 2012. The Act
retroactively changes 2012 to and sets 2013 at $500,000 and $2 million.

(5)Faster depreciation
of leasehold improvements

The Act extends
the 15-year depreciation period for qualifying leasehold, retail and restaurant
leasehold improvements.

For example, the
new Mad Mike’s at the Newport Levee would have been depreciated over 39 years.
Now it can be depreciated over 15 years.

(6)Research tax credit

The Act extends the research credit through
2013.

This credit is available for improvements in
the production process as well as to the product itself. Think Apple and Pfizer.

(7)Work opportunity tax credit

This is the tax credit for hiring individuals
on welfare, being released from prison, collecting social security disability
and so forth.

The credit is not insignificant: 40% of the
first $6,000 in wages.

Who is this credit important to? Think Cracker
Barrel and ....

(8)Veterans credit

Technically this is a subset of the work opportunity credit from (7)
above.

Unemployed and disabled veterans are a qualifying category for the tax
credit, although the credit
amount can vary from $2,400 to $9,600 depending on how long the veteran has
been unemployed and whether disabled.

(9)The Nascar loophole

If you were thinking of building a “motorsports entertainment complex,”
the Act will allow you to take accelerated depreciation. You have to build it
soon, though.

This one could not be more obvious if Jeff Gordon
ran over you.

(10)Cover
over of the rum excise tax

There is an
excise tax of $13.50 on every gallon of rum sold in the United States. That would
normally be a business-breaker, but the government refunds almost all the tax -
$13.25 – to Puerto Rico and the Virgin Islands in the form of economic aid.
This is called the “cover over.”

By far most of
the money goes to Puerto Rico.

However...

Do you know Diageo?
They are based in London and produce –
among others - Captain Morgan rum. A few years ago, they moved their production
of Captain Morgan from Puerto Rico to St. Croix, which is in the Virgin
Islands. It seems that the USVI was able to provide a (1) 90% tax break, (2) a
bigger kickback of the cover over, and (3) an exemption from property taxes.

(11)The “Subpart F active financing exception”

You ever wonder
how a company like General Electric can pay no corporate income tax?

Well, one way is
that they lost a lot of money in previous years. This provision is another way.

The U.S. (generally)
considers interest earned by a U.S. corporation anywhere in the world to be a passive business activity. Makes
sense, as accountants could easily move interest from country to country. By
calling it passive, the goal is to make the interest taxable to the U.S. There
are exceptions, of course, and this is one.

This provision came
into being in 1997 and with a significant amount of lobbying by General Electric.
Why? Think G.E. Capital, and you are on the right track. It allows one to
establish a captive finance company overseas, generate profits there but not
pay taxes on the profits until the money is brought back to the U.S.

This provision
has been extended many times since 1997. It has now been extended again.

About Me

Thirty years years in tax practice. It's a long time, and I have seen virtually everything short of the fabled tax-exempt unicorn. I was raised in Tampa, went to school in Missouri, taught at Eastern Kentucky University, lived in Georgia, got pulled to Cincinnati when I married, have in-laws in England and a daughter going to the University of Tennessee. I am not sure where I will wind up next, but I hope there is better weather.